Welcome everyone to UMC's 2023 third quarter earnings conference call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question and answer session. Please follow the instructions given at that time if you would like to ask the question. For your information, this conference call is now being broadcasted live over the Internet. Webcast replay will be available within an hour after the conference has finished. Please visit our website, www.umc.com, under the Investor Relations, Investors Event section. Now I would like to introduce Mr. Michael Lin, Head of Investor Relations at UMC. Mr. Lin, please begin.
Thank you, and welcome to UMC's conference call for the third quarter of 2023. I'm joined by Mr. Jason Wang, President of UMC, and Mr. Chi-Tung Liu, CFO of UMC. In a moment, we will hear our CFO present the third quarter financial result, followed by our president's key message to address UMC's focus and fourth quarter 2023 guidance. Once our president and CFO complete their remarks, there will be a Q&A section. UMC's quarterly financial reports are available at our website, www.umc.com, under the Investors Financial section. During this conference, we may make forward-looking statements based on management's current expectations and beliefs. These forward-looking statements are subject to a number of risks and uncertainties that could, that could cause actual results to differ materially, including the risk that may be beyond the company's control.
For a more detailed description of this risk and uncertainties, please refer to our recent and subsequent filings with the SEC and the ROC security authorities. During this conference, you may view our financial presentation material, which is being broadcast live through the Internet. Now, I would like to introduce UMC's CFO, Mr. Chi-Tung Liu, to discuss UMC's third quarter 2023 financial result.
Thank you, Michael. I'd like to go through the third quarter 2023 investor conference presentation material, which can be downloaded or viewed in real time from our website. Starting on page four, the third quarter of 2023, consolidated revenue was TWD 57.1 billion, with gross margin at 35.9%. Net income attributable to the shareholder of the parent was TWD 16 billion, and the earnings per ordinary shares were 1.29 TWD, which is slightly better than the previous quarter of 1.27. And our shipment in the third quarter declined sequentially about 2%, and capacity utilization rate in the third quarter was 67%.
Page five is the income statement for the third quarter, and revenue grew 1.4% sequentially to TWD 57 billion, due to a better mix and also better blended ASP, as well as helped by the favorable exchange rate. Gross margin remains somewhat similar to the previous quarter at 35.9% or TWD 20.4 billion. Operating income reached about 15.96 billion, which is equivalent to 1.29 EPS in the third quarter of 2023. On page six is the first nine-month performance. Because of the downturn of the cycle, we witnessed around 20.5% year-over-year decline in our top line, which was TWD 157.5 billion.
Gross margin rate dropped from 45.8% in the previous years to the first three quarter of the year of 2023 of 35.8%. EPS for the first three quarter of the year reached 3.87 TWD per share. On page seven, the cash on hand is still around TWD 140 billion, with the total asset is more than TWD 547 billion. On page eight, our blended ASP, as I mentioned earlier, due to the better mix and also the difference in between 12-inch and 8-inch wafer capacity utilization rate, our ASP, blended ASP in the third quarter continued to edge up in the third quarter of 2023.
For revenue breakdown on page nine, Asia remains the biggest segment of the pie, around 58%, which grow about two percentage points from the previous quarter. Europe and North America remain unchanged, when Japan declined by about two percentage points in terms of revenue breakdown. IDM versus fabless on Page 10 remain unchanged quarter-over-quarter. On Page 11, we see a small increase in communication, which is 46% in the third quarter. Consumer dropped from 26% in the second quarter to 23% in the third quarter of 2023. On page 12, along with our increased capacity coming out of our P6 in 22 and 28 nanometers, our revenue also grow accordingly, now reach 32% in the third quarter of 2023.
For total revenue for 40-nanometer and below in the third quarter reach 45%, which, compared to 41% in the previous quarter. For capacity breakdown, on a quarterly basis, on Page 13, as P6 continued to have new capacity come on stream, we see about more than 1% capacity increase in the third quarter. And, following quarter, in Q4, we expect to see more than 2% sequential capacity growth, also mainly due to the capacity increase in our Thailand P6 facility. On last page of my presentation is on foundry CapEx, which currently running on track, and it's budget to be remain unchanged around $3 billion for year 2023. So the above is the summary of UMC results for third quarter 2023.
More details are available in the report, which has been posted on our website. I will now turn the call over to our President of UMC, Mr. Jason Wang.
Thank you, Chi-Tung. Good evening, everyone. Here, I would like to share UMC's third quarter results. During the third quarter, despite a 2.3% decrease in wafer shipments, quarterly revenue and gross margin remained firm quarter-over-quarter, which is primarily attributed to the demand strength in computing and communication segments, continuous product mix enhancement, as well as a favorable currency movement. From end market perspective, strength in computing applications was propelled by LCD controllers, Wi-Fi, codec, and touch IC controllers, while shipments in communication segments increased due to demand for RF front-end IC and networking chips. Looking back at 2023, although foundry industry experienced a significant decline in market demand, UMC maintained solid structural profitability, supported by firmness in blended ASP, due to continuous product mix optimization efforts and the increased contribution from specialty technologies.
As UMC continues to introduce new specialty technology to solidify our differentiation, we will strengthen the competitiveness of our customers and enhance their respective market position. For the fourth quarter, with the recent rush order from PC and smartphones, we expect demand has gradually stabilized. However, customers still employ a cautious and conservative approach in maintaining a lean inventory level, while automotive business conditions appear challenging. For 2024, we anticipate the production ramp of our 12A P6 fab will further enhance revenue contribution from 22- and 28-nanometer, continuing the robust business traction for UMC. In addition, through our technology leadership, we will ramp up our offering on 22-nanometer derivative products, which will further our specialty technology product pipeline. Now, let's move on to the fourth quarter 2023 guidance. Our wafer shipment will decline by approximately 5%. ASP in U.S. dollar will remain flat.
Gross margin will be in the low 30% range. Capacity utilization rate will be in the low 60% range. Our 2023 cash base CapEx will be budgeted at $3 billion. That concludes my comments. Thank you all for your attention, and now we are ready for questions.
Thank you, President Wang. Ladies and gentlemen, we will now begin our question and answer session. If you have a question for any of today's speakers, please press star one on your telephone keypad, and you will enter the queue. After you are announced, please ask your question. If you find that your question has been answered before it is your turn to speak, please press star two to cancel the question. Thank you. Now, please press star one to ask the question. Thank you. Our first question is from Sunny Lin, UBS. Go ahead, please.
Good afternoon. Thank you for taking my questions. So my first question is on gross margin. Q1, I mean, Q3 gross margin was actually better than guidance. But even with that, Q4 gross margin is going to drop towards low 30%. What's the key factors affecting gross margin into Q4?
Well, first of all, for Q4 gross margin, guidance will be at a low 30% range, mainly due to a decline in utilization rate, as we expected there will be probably a 5% decline in shipments.
Got it. Then on the overall pricing environment, are you seeing any differences, i.e., intensifying competitions because of the slower demand recovery, portfolio coming few quarters?
Well, I mean, we very much aware of the market situation, and we respect the foundry market and pricing trend. We aware of the market dynamic and competitive landscape, so we will closely monitoring the market and align with our customer on pricing position to ensure our customer's competitiveness. And along with securing their market share, that will be our objective. UMC maintain our pricing strategy. In addition, we do believe our value-added technology, manufacturing quality, and capacity alignment that support our customers enhance their market position. However, we observe the 8-inch market landscape has intensified, like you said, so we may have to adjust some pricing for some market segments to align with the market dynamics. For the 12-inch business, we will remain firm on our pricing position, which will reflect our value.
Got it. Thank you very much. That's very clear. So my second question is on 20-nanometer. UMC has built a fairly strong presence in some of the products like OLED driver, Wi-Fi, ISP, et cetera. But I believe some of your competitors are also trying to ramp up capacities and capabilities, especially for OLED driver and Wi-Fi. And so going forward, looking into next 2 years, 3 years, how should we think about the overall competitor landscape for 20-nanometer? And what are some of the new product opportunities that you will look to ramp in the coming few years?
Well, I mean, there's a couple questions. What is our current 28-nanometer outlook, right? For the 22- and 28-nanometer loading, we have remained resilient amid near-term market volatility. Well, thanks to our customers' stickiness, our diversified product portfolio and technology differentiation. And we will continue to extend our 22- and 28-nanometer market share with the application like OLED driver, ISP, Wi-Fi, SoC processors, while we are working with the leading customer companies to bring up more applications on 22- and 28-nanometer platform. As far as the competition, you know, we do believe, you know, there's always a competition there, and we will strive to compete with that, particularly in the 28 high voltage space you mentioned. I...
Well, we believe, first of all, we believe the OLED market will continue to grow, and we will continue to maintain our leadership, technology position, and the market share position, even though we are collaborating with multiple leading customer in those key markets.
Got it. Thank you very much.
Thank you. Next question, Nicolas Baratte, Macquarie. Go ahead, please.
Yes, hi. When you guide for 4Q wafer shipment to decline 5% Q-on-Q, is there any segment specifically that we can attribute this to? And what I mean, in particular is, you know, you mentioned better demand from computer and communication 3Q. Is it still the case in 4Q, or what is changing into 4Q that you could talk about? Thank you.
Sure. For the Q4 outlooks and currently, we see the PC and the Chinese smartphone segment will remain in line with the Q3. However, for the automotive market, given that the customer have been accumulating backlog from early, you know, last year to probably be Q1 this year, we expect higher than expected inventory build-up already. As a result, our auto business is projected to decline in Q4. But full years, automotive contribution will still count for mid-teens% of our wafer revenues.
Thank you. I don't think you report your revenue exposure to the industrial segment, but do you see similar trend in industrial?
It's similar, but it's actually better than automotive right now. You know, both automotive and industrial is covered under the others, but the major decline is coming mostly from automotive space.
Thank you. Maybe for Chi-Tung Liu, any updated view on depreciation this year compared to last year?
This year-
Declining a little bit.
Yeah. In terms of absolute depreciation expenses, this year, 2023, is likely to be the bottom of recent years. We probably will witness the lowest point in terms of absolute depreciation expenses in 2023. Going to 2024, because of our P6 expansion in Tainan, coupled with the Fab construction in Singapore, the overall depreciation will start to rebound. And the increase rate in 2024 will be more than double-digit, which we will provide a more precise number, precise range, in the next quarter's conference call.
I understand next quarter, Chi-Tung, but you know, my mechanical model, you know, a very mechanical projection with percentage of PP&E, tells me next year, depreciation could go up 25%. Does that sound vaguely possible?
Well, again, this year we will see a 5%-10% decline first. So it's a really recent low in terms of-
Okay.
Annual, annual numbers. But next year, 2024, yeah, your number is in the ballpark.
Thank you.
Thank you. Next one, Gokul Hariharan, JP Morgan. Go ahead, please.
Yeah, hi, thanks for taking my questions. First of all, could you talk a little bit about all this capacity that's been announced and coming online in so many places, but especially in China? We start to hear a lot from your customers also about pretty aggressive price quotes from Chinese foundries and some of the your customers starting to consider some of the capacity as well. So my question is like, a little bit longer term: How do you think about pricing, given that foundry industry has seen a pretty nice price increase through the last 2-3- years, in the pandemic years especially?
What kind of price premium can UMC maintain in like 28-, 40-, 65-nanometer kind of nodes over some of this more aggressive competitors that are coming up? Also, could you kind of refresh our memory on what is your current LTA coverage, given that you have some of the new capacity that is coming on, that has come online with pretty high LTA coverage?
Well, okay. Yeah, sure. Well, I mean, the competition's always gonna be there. As you said, there's many new capacity announced, particularly coming out from the China. And from UMC, we have always tried to maintain our competitiveness through a few area. One is the continuous technology innovation. Second is diversify the production side with a sizable capacity offering, and which has actually become, you know, increasingly important. Third is the manufacturing excellence. You know, we all know both cycle time quality as well as the yield, so important to customer and for them to be competitive. And the fourth is the, you know, with the broader customer base and the product portfolio. With this compelling differentiation, we believe we can continue to provide a reliable and dependable path to secure future growth for our customers.
So that's, you know, pretty much on a higher level. Your question relates to in some terms the pricing. You know, like I mentioned earlier, we respect the market dynamics, and we will stay competitive in supporting our customers to be competitive. Right now, you know, we have discussed and continue aligning with our customer, usually on an annual basis, as a one-off pricing alignment. We will continue with that practice and with, you know, with the understanding of the market outlook. For that, that will be a different pricing position in terms of different technology nodes, like you said. For 28, you know, we are remaining resilient amid the near-term market volatility, as well as the forward-looking product pipeline.
We feel rather comfortable about the confidence about our 28-nanometer. For the mature 12-inch outlook, we will transition into more specialty technology for our mature 12-inch nodes, and where we foresee promising new opportunities, which coming into notebook and tablet space, such as RFSOI, non-volatile memory, and high voltage. We'd anticipate a 55- and a 40-nanometer will be a mainstream for RFSOI and MCU for a broader range of the market, including the wireless, automotive, and industrial application. Again, we will stay competitive, and then we will align with the market dynamics and to support our customer in terms the commercial needs. Yeah.
Got it. Thank you, and thanks, Jason. Could you also refresh your memory on roughly what is your LTA coverage now? I think it used to be about 30%-40%, but looks like that's gone up, given the new capacity that's coming.
If you're talking about MTA or LTA?
LTA, sorry, LTA.
The LTA has been stayed fairly flat. It's about 25%-30% coverage. And you know, we've been reporting many times in the past, you know, the LTA still is a mechanism to support both customer and UMC on the longer term perspective. And particularly given the recent market dynamics, and we both are examining our current LTA quality as well as the status on the LTAs. And because our customer continue want to make sure their supply resilience and align with our, you know, interest of protecting our investment. So, many LTAs being reviewed, and we you know, we actually believe those LTA has mutual commitment as to them.
The 25% and 30% remain fairly resilient at this time. Yeah.
... Okay. One follow-up on the LTAs. Are you seeing any price downward negotiations on any of your LTAs, given that you mentioned that you're seeing some of the reviews on the LTAs right now?
Well, during the downturn cycle, we definitely work with our customer and look at the market situation, and given the change in the demand and supply dynamics. And we, between the UMC and our customer, remain confident in the long-term objective. But in the short term, you know, we do have some tactics and flexibility to make the customer and UMC collective to navigate through this market fluctuation. So yes, there are some flexibility in terms of that. With the long-term contractual obligation commitment, that they are still intact.
Understood. Thank you. One last question from me. How do you think about capacity expansion, given the downturn seems to be lasting a little bit longer than expected, and you're running at 60% of low sixties utilization exiting the year. Do you have any thinking about pushing out some capacity expansion further, especially for some of the new capacity in Singapore? Importantly, so because depreciation burden is also rising quite a bit, going into next year?
So absolutely. For the P6, you know, we already in the process of ramping up, so-
Yeah
... it is harder to making adjustment on those. So we anticipate our 12 P6 monthly capacity will still reach to 12K per month by end of 2023, and it will reach its design capacity of 31.5K per month by September 2024, and that's still there. For the P3 Singapore, we have deployed a clean room construction, so the clean room will still be ready by the H1 of 2024. But however, we expect the P3 capacity ramp starting time at April 2025 without change, and because we have alignment with some of the customer already. However, the ramp profile will be moderated based on the market dynamics, which that has some adjustment to the ramp profile.
Understood. That's it, yeah. Thank you very much. Thank you.
Thank you. Next one, Bruce Lu of Goldman Sachs. Go ahead, please, Bruce.
Hi, thank you for taking my question. I want to ask you about the outlook for 2024. I mean, based on my, you know, mechanical mathematics, you seems to be very comfortable for your P6 expansion with LTA remain on track. So with P6 will give you 30,000 wafer per month capacity for next year. Each wafer should be $3,000-$3,500. You multiple by that, you can easily get like, you know, 15%+ revenue growth. In addition, you should have some inventory restocking from that. So that can usually give you, like, 15%+ revenue growth for 2024, 2024. So does that sounds right? I mean, at least you can get the revenue growth from your LTA contribution from P6, right?
I mean, yeah. I mean, of course, the revenue growth for the 2024 will. It's a composition between the volume and the ASP. So for the 2024, our early view for the next years, we will expect our loading and wafer shipment will increase year-over-year. And so that said, however, the, you know, we have to look at, you know, quarterly outlook, you know, by quarterly, given we're saying the current customers behavior are more cautious and conservative. So we will provide quarterly outlook on quarterly basis.
So, you know, so in terms of actual, you know, what will be the growth for the next year, we probably will give you a bit more clarity in the upcoming call.
At least for the LTA pricing and environment is for sure, right?
I mean, yes. I mean, LTA right now is still intact, and so for that portion, it is. But there's still some base that have to align with the market dynamic. And also on the same time, we did talk about for the LTA, there are some flexibility in terms of adjustment, but the longer term perspective on LTA did not change. But the short term, LTA, it has some flexibility that we are trying to align with our customer with. So it, they also will come to account for the next year's projections. Yeah.
I see. Understand, because the reason I ask is the LTA alone is 50, is 1 by 15%+ for the growth, unless you have a lot of push out or additional ASP erosion, otherwise, that should be the base case.
Well, in theoretically, that's correct assumption, but, you know- ... you have to look at the mix, right? Yeah.
Understand.
Yeah.
The second thing is that I try to ask a bit different question. If you look at your customer profile, Asia customer contribute a lot more than most of your peers. The communication also consume a lot, you know, a major portion of it, which result in a much bigger fluctuation in terms of revenue, orders, visibility, longevity too. Do you see any change, any possibility to see meaningful changes in terms of your customer profile and application profile in the coming years?
I mean, the, we, we continue enhance our product mix, right? I mean, not only from the, from the broader customer mix point of view, also look at from the, the product mix point of view. So, I think that's, that's the, the clear focus. All right. However, whether the, the addressable-- We have to also address, align to our addressable market, and whether the addressable market is representing higher percentage of the communication and, and computing, towards the, the consumer, and which is highly tied, aligned with the, the, the Asia market. We, we, you know, we may not be able to immune from that. But, you know, we, we definitely want to continue to increase the quality of that mix, and that will be our objective here not typically from the geographical standpoint.
So can we foresee a narrower range for the peak-and-trough margin moving forward? Because margin, you know, volatility is still very big. It's still, you know, a lot of investors feel, don't feel comfortable with.
Right. So, like we said, you know, the technology innovation, differentiation, you know, giving the diversified capacity, you know, located in a different region. And giving the specialty offering, we think that will help us to defend that, to a certain extent. The other approach is, you know, we are committed to continue developing the FinFET technology that will actually enlarge the differentiation offering as well. And, you know, we continue with that development and the, in terms the. And we see some of the progress on our FinFET development as well.
We have successfully entering into the mass production of our 22-nanometer business, and we have witnessed some steady rise of the revenue, some 22, and then which we can build upon our 22 low power logic expanding into the specialty now. At the same time, we based on that customer base continue migrating to the FinFET. We think that will also help us in terms of differentiation, yeah.
I see. Thank you.
Thank you. Next question, Charlie Chan, Morgan Stanley. Go ahead, please.
Good afternoon, Jason, Chi-Tung, and Michael. First of all, congratulations for great results. The gross margin, you know, sustained at very, very good level. So my first question is really a follow on your 12-nanometer. So I do agree that is the key approach for UMC to differentiate yourself, especially compared to China competitors. So since you mentioned that there are some kind of demand from certain customers, can you elaborate a little bit? First of all, when are you going to spend CapEx for data FinFET capacity? And secondly, you mentioned about low power logic.
Can you give us some hints on what kind of application or products for the 12-nanometer FinFET? Thank you.
Sure. Well, first of all, FinFET does give you a power leakage benefit, so there is continue with the low power benefit on the FinFET. Our plan is to fully exploit the DUV capability, which, you know, we can continue migrating to FinFET for that reason. So we actively progressing with the development of specialty FinFET, based on the 14 FinFET to date that we have. And also the 12 FinFET, based upon the current FinFET technology. We are currently engaging with customer on product spec, performance, criteria, as, you know, to fulfill their needs. And as for the capacity expansion, the future FinFET expansion consideration, all business will still subject to our ROI justification to ensure the proper return on investment.
For the capacity preparation, the method that we approach, the approach that we have, is we will employ a cost-effective approach using the existing 22-nanometer and 28-nanometer capacity pool to transition into the FinFET, based on a high two conversion rate. So that will help us to achieve our ROI-driven criteria. Meanwhile, we will give you more update on our FinFET technology development when it's more appropriate.
Got it. Thanks. So, Jason, just roughly, since you have a great idea, you know, about the end demand, even some smart and efficient way to convert capacity from 28-nanometer or 20-nanometer for that demand. So, can we get a sense when you're going to see a first revenue contribution from 12-nanometer?
For the 12 nanometers, the process will be phased in... in early 2025. So, I think there's probably, you know, there will be time after that. Well, so when the time come, we'll probably better that will give you more precise projections, because the process-
Mm.
-based by the probably Q1 2025.
Okay. Thanks for that. And then, coming back to more, kind of short-term, questions. So, you mentioned about some rush orders, but you also said that customers want to keep the inventory offer very lean. So my question is, you know, first of all, do you expect those rush orders keep coming in the coming quarter? And, compared to the traditional seasonality, do you think your first quarter, the January or February relation, will be better than historical seasonality? Thank you.
Okay. Well, I mean, we certainly hope that the rush order come in.
Mm-hmm.
Well, as for the Q1 outlook, we we'll provide that in the upcoming January call.
Mm-hmm.
From the inventory, I mean, the fundamentally is we believe, you know, given the rush order coming out from the PC and the smartphone space, and we believe there's a sign that indicates-
Mm-hmm.
There's going to be an early sign of it as it in the inventory correction for this segment.
Mm-hmm.
However, there are other market segments that still, you know, having inventory build out that could lingering into 2024. So we just have to, you know, we have—we are optimistic, but we, we have to be cautious about that. So we will continue monitoring the rush order situation as well as the DOI situation on those segments.
Mm-hmm.
Hopefully, we can validate that some of the segment is for sure, well, out of the inventory correction cycle. But we do know the auto will probably lingering into 2024.
Got it. Thank you very much. And my next two questions for Chi-Tung, if that's okay. So it seems like you have a ballpark depreciation increase for next year, and Jason, you know, you know, share some confidence about the pricing trend, especially for 12-inch. So I'm wondering whether full-year 2024 you can maintain gross margin at above 30%? Because based on the third quarter trend and the fourth quarter guidance, I feel like there is a kind of achievable target. But I just really want to get some comments or confirmation from management.
Yeah, we cannot commit on the numbers, but we do foresee-
Mm-hmm
Headwinds from micro uncertainties, such as utility, green power, associated carbon costs.
Mm-hmm.
Increasing depreciation in 2024. So, but we will strive our best to maintain our profitability structure.
Mm-hmm.
We will continue with our cost reduction effort, hopefully can offset the impact from those headwinds I just mentioned.
Mm-hmm.
But the income number is still will be on a quarterly basis, and,
Mm-hmm
... we will provide that on next quarter.
A-and Charlie-
Thank you.
If I...
Yep, mm-hmm.
I may add,
Sure.
Our perspective now is that amid the inventory correction cycle-
Mm-hmm
...you, we have dramatically improved our structural profitability compared to the-
Mm-hmm
... pre-pandemic period.
Mm-hmm.
We have strengthened by the stable ASP, cost reduction, you know, conducting many cost reduction activities and-
Mm-hmm
... continuing product mix optimization. And the-
Mm-hmm
... and the increasing contribution from specialty technology.
Mm-hmm.
All this activity will work out to offset the headwinds, such as rising cost and depreciation.
Mm-hmm.
We do expect when the demand returns, our profitability will also return to a healthier level.
Right.
We can't really guide you a number right now, but-
Mm-hmm
... but we also understand and, you know, humble enough to understand there will be a, we will foresee some of the cost increase headwinds, and we, we
Mm-hmm
... we will continue to manage that cautiously, as we have done in those two years. Yeah.
Got it. And Jason, sorry, I come up with a follow-up question to your previous 12-nanometer comment. So I'm a little bit surprised that you plan to convert some 28-nanometer and 22-nanometer for the FinFETs. Is that because you have some conservatism for your long-term 28-nanometer demand? Or why don't you, you know, try to buy new equipment for the FinFET capacity expansion?
I mean, clearly, we have, for this past few years, we have driven this. We do have an ROI-driven principle that we have-
Right
... obey by. So, the converting a 20-28 nanometer capacity is one of the possibility.
Mm.
That's the only possibility. So-
Mm
... we will look at overall ROI and also the company's financials and to determine what would be the-
... Okay, I don't need to interpret it that as kind of some concern about the 20-nanometer overcapacity in the long term?
Right. Like I said, you know, the earlier,
Mm-hmm.
Once this is more clear.
Mm-hmm.
We will report that, at, at the appropriate time.
Okay, thanks. And sorry, the last question to Chi-Tung Liu is really about... Sorry, actually two questions. So first of all, for your third quarter gross margin, how much of that is coming from the currency depreciation help? And second, small question is about the China government subsidy contribution to your OpEx, and would that totally go away in 2024? Thanks.
So every one percentage point change in currency, it will cost around 0.4%, percentage point change in our gross margin.
Mm-hmm.
So, that answer your first question.
Mm-hmm.
Secondly, for the subsidy for our Xiamen fab, that number goes along with our depreciation curve for our Xiamen facility, which has come to an end of majority of that has come to an end by end of this year. Going forward, we will still have some small portion of subsidy coming in, but it will not go back to the previous level.
So may we know a rough difference between this year and the next year in terms of the total amount of the subsidy from China government? Just a rough idea.
Yeah. On average, it will be steady, slowly decline from the third quarter level, which is a little bit over TWD 500 million NT.
Okay. So TWD 500 million in third quarter, and will gradually phase out to, like, $100 million by the end of next year, per quarter?
It will gradually decline, but we will continue to apply for merit-based incentives, not only in China, but in many other our production site as well. So there will still be some.
Mm.
Yeah.
Okay. Okay. Thank you very much.
Thank you. Next one, Szeho Ng , China Renaissance. Go ahead, please.
Hi, gentlemen. My first question regarding silicon interposer . For the capacity we put in, will it be dedicated for interposer production only, or will it be fungible between interposer and silicon wafer fabrication?
Well, I mean, the silicon interposer is a part of the capacity.
Mm-hmm.
The dedicated tool on the silicon interposer cannot be converted back to the other use, but there are common tool that can be used. So, I don't know if that qualify as a fungibility, but, yeah. On a dedicated tool standpoint, no, it's not. But that's-
I see.
That's a relatively small portion. Yeah.
Right. Got you. Got you. And the other question regarding the automotive inventory adjustment. You mentioned that Q4, we start to see some adjustment, but how long would it last in your opinion?
I mean, they started adjust after the Q2 this year, and so-
Mm-hmm
... we have facing the automotive inventory adjustment, I mean, demand adjustment happening starting from Q3 already.
Mm-hmm.
We do believe this will probably lingering into 2024. Yeah.
For 2024, the entire year or the H1, next year?
Well, I mean, it's also subject to the end market consumptions. We hope-
Mm.
The correction will be ended in the first part or, you know, H1, and but also subject to the end market and macro environment. So we will continue monitoring that. Right now, for sure there's inventory build-up for automotive space, and we do believe-
Mm
... that will linger into 2024. In terms of whether they will be depleted by early or mid or later, we will continue to update that on quarterly basis. And it's-
Uh-huh
... it is our hope that they can deplete as early as possible. Yeah.
I see. I see. And based on the initial selling, yeah, do you think the adjustment will be more severe in Q1 compared with Q4? I mean, for the automotive vertical.
I mean, we already see quite a bit of adjustment in Q3 already.
Mm-hmm.
We continue adjust in Q4, and so, and we do believe that will linger into Q1. In terms of magnitude, again, we're subject to the macro, you know, situation. So, we just have to see it. We also kind of updated earlier, saying because giving the customer current behavior, you know, this behavior is more of a cautious and conservative.
Mm-hmm.
So the visibility is much shorter. And so, so we'll probably better that if we give you more precise, you know, view on a quarterly basis. Right now, our view is that inventory will lingering into 2024.... Mm-hmm. I see. All right, fair enough. Thank you very much.
Thank you. Next question, Brad Lin of Bank of America. Go ahead, please.
Thanks. Thank you for taking my question. Hi, Jason Wang, congrats on the strong third quarter results, and I have two questions. So basically, one on the generative AI, and another is on the wafer to wafer technology of UMC. So firstly, have the firm seen business opportunities also rising from the end device AI application? And if any, are the key specs of those chips, and what time do we expect it to take off? Thank you.
I mean, sure.
That's my first question.
Of course. The in the portal for sure, but before that, your question about AI. AI is a mega trend, and it has rapidly emerged as we see. And there will be a strong demand on related chips on various functionality such as the sensing, MTU connectivities. And so that's within our addressable market. And so UMC is proactively preparing those solution to for this market, and that includes the interposer solution as one. And we hope that, you know, having those solution prepared, we can enable our customer to capture those market share in the AI applications. So many of the product that we're engaging today, we do see there's a high possibility they will start adding the AI function into it.
So we just have to align with the product specification, make sure we can enable and support them with that. For as far as the near term, you know, very specifically on the interposers, we're already in interposer production. Currently, UMC interposer capacity plan will be doubled to reach 6K per month by Q1 2024. At this point, any additional capacity for interposer expansion will depends on customer demand out as well. So, meanwhile, we are continue developing the active interposer, which support the DTC, the deep trench capacitor, and for the active interposer so on. So the roadmap is also aligning with the customer for the future growth in the interposer space. Yeah.
Got it. So for the interposer expansion, we believe it definitely depends on, very much depends on the client demand. So compared to our last earnings call, do we see the demand is getting stronger or it's just well, flattish in terms of visibility?
We already increased double to 6K, and beyond that 6K, you know, we have not have any alignment for increase that beyond the 6K. Right now, the focus is more on the pipeline of continuity for the interposer solution. So in terms of technology development, that's already aligned for the next generation. But in terms of capacity, no, there's no number beyond the 6K yet. Once there's any number increase, we can also report that.
Got it. Thank you very much. So, the second question is on the wafer to wafer technology. So we have learned UMC has been investing in this technology for many years, and what time do we expect the contribution to rise? And what are the key applications that we expect to, well, adopt this kind of the technology? Thank you.
The first product, you know, by using the Hybrid Bond will be in the RF front-end modules. So, and that's already... The development is already underway, and so we, you know, we do believe that will provide many benefits. So, we have some expectation on that. So but the program is under development, and the product application will be for the RF front end.
Got it. Thank you. And then may I know the potential margin profile for this kind of the product?
I mean, as we said, we continue enhance our product portfolio and the product mix. And, you know, for those specialty technology, it will continue helping us to achieving that target. So, from a, from a mix standpoint, it will be benefit from it. Yeah.
Got it. Thank you very much. That's very clear. Thank you.
Thank you. Ladies and gentlemen, we are running out of time, so we're taking the last one. The last question, Gokul Hariharan, JP Morgan. Go ahead, please.
Yeah. Hi, I just have one question, given this comment about the depreciation increase next year. Could you talk a little bit about what are our like medium-term gross margin, gross margin targets? Like, do we expect to still remain within the 35%-40% kind of gross margin range? And especially since you're also thinking about potentially developing some chipset nodes, especially the 12-nanometer nodes, in 2025 and beyond, which are likely to be a little bit more expensive. Just wanted to understand what is the rough gross margin kind of range that management is comfortable operating in over the next couple of years?
... Yeah, of course, thank you for the question. When Charlie asked about our margin and the outlooks, I kind of adding a comment about it's our belief that our structural profitability is become much resilient and healthier. And so it's also our belief once the loadings return and the profitability will also return to a healthier level. When we talk about healthier level, you know, we believe it's gonna be in a high 30, 40% range for in a very high loading situation. So, we, you know, we continue to march into that direction, and we have confidence that we've-- that, that's, you know, fairly achievable.
But given the past few years, we've just gone through the super cycle, and now we're going through the down cycle, and we want to test it. We want to test that situation, and hopefully, that we can report to you more clearly in a later date. But, you know, we, you know, while we have a mapping now and model it, we think we have a roadmap to achieve that. And in turn, when can we achieve that, we'll giving, let's give that test, and then we'll report that, you know, on a timely basis. Yeah.
For 12 FinFET capacity build up, as Jason mentioned, it has to be ROI justified. So we will do it with the precondition that it won't damage to our overall corporate average structural margins. So, we mentioned that it could be coming from some of the conversion of 22, 28 capacity, which will result in a better margin compared to our greenfield FinFET capacity. But we are also working on other solution too. So, it will be a few years out in terms of massive FinFET capacity. So, we still will have a few more options coming along, coming in the pipeline.
So go, go, go.
Thank you.
Yeah, we will definitely-
Yeah.
Keep that discipline. As you can see, for the past few years, we, we have been keeping that discipline. Yeah.
Definitely. Thank you. One last question is on the 8-inch side. It seems like in the short term, 8-inch is facing a lot more pressure. Many staple products on 8-inch have already migrated to mature 12-inch, whether it's 65, 55 nanometer or even 40 nanometer. So how do you see the 8-inch evolution in the next couple of years? Do you feel that 8-inch, at least some of the capacity, will start becoming a little bit obsolete in the industry, given many applications, especially high volume applications, are migrating to mature 12-inch with time down?
Sure. I mean, the reason 8-inch loading has declined as a result of the demand softness across communication, consumer, and computing segments. We still believe the 8-inch is the mainstream now for PMIC high voltage application, so we expect the 8 -inch loading will improve when the market rebounds. Meanwhile, we do see some intensified competition in the 8-inch landscape, like you said, such as a 12-inch supplier participating in the 8-inch business. Even with, you know, some of the question earlier, the Chinese local manufacturer fulfill the demands and, you know, for the domestic demand and the pricing pressure as well. So UMC will continue to strengthen our technology competitiveness, enhance our product and customer portfolio to adjust our... And also adjust our pricing strategy to address the 8 -inch competition.
Now, as far as the loading recovery, in the short term, I think the pricing will mitigate some of the 8 -inch business when the demand recovers. For the longer term, well, giving the time and the resource required to enhance the fundamental position of, for the competitiveness solution, where the pricing is not the only alternative, and we probably have to do with all above mentioned effort and focus. However, we do expect the 8-inch loading and product composition will improve to a healthier level. And for the recovery mode, we'll probably undertake for at least 12 months. Yeah.
Understood. That's yeah. Thank you. Thank you. Thank you very much.
Sure.
Thank you. Ladies and gentlemen, we thank you for all your questions. That concludes today's Q&A session. We now turn it over to UMC head of IR for closing remarks.
Thank you for attending this conference today. We appreciate your questions. As always, if you have any additional follow-up questions, please feel free to contact UMC at ir@umc.com. Have a good day.
Thank you. Ladies and gentlemen, that concludes our conference for Q3 2023. Thank you for your participation in UMC's conference. There will be a webcast replay within 2 hours. Please visit www.umc.com under the Investors Events section. You may now disconnect. Goodbye.